ENCANA CORPORATION Q1 2018 Results Conference Call May 1, 2018
ON TRACK FOR A STRONG 2018 & 5 YEAR PLAN On track to deliver >30% annual production growth* within cash flow Ŧ Core assets on track to deliver 400 MBOE/d - 425 MBOE/d in Q4 2018 Q1 2018 achievements Offsetting inflation and service pressures in active Permian basin Drilling activity to support Montney liquids growth plan 2 new liquids hubs on schedule Ramped up drilling activity in Eagle Ford and Duvernay to support free cash flow Cube development drives operational excellence Maximizing NPV of land base Completion design producing better wells Commercial mindset maximizes cash flows and de-risks plan Midland and AECO physical and financial risk management Ŧ Non-GAAP measures defined in advisories. For additional information regarding non-gaap measures see the Company s website * Adjusted for 2017 dispositions
MBOE/d CONFIDENT IN 2018 EXECUTION Plan To Deliver >30% Production Growth* Within Cash Flow Ŧ >30% annual production growth* within cash flow Ŧ Capital program front end loaded Restarted Duvernay drilling in January Ramped up Eagle Ford drilling in Q1 Montney activity higher in Q1 and Q2 as part of liquids growth plan, preparing to fill liquids hubs Production growth weighted towards second half of 2018 Two Montney liquids hubs come on line in Q4 >20% production growth second half of 2018 versus first half of 2018 Efficiency & innovation offsetting service cost inflation >20% Production Growth in 2nd Half 2018 450 400 350 300 250 200 150 100 50 0 2H 2016 1H 2017 2H 2017 1H 2018F 2H 2018F Total Production for 2016 & 2017 excludes production from assets sold in 2016 & 2017 Ŧ Non-GAAP measures defined in advisories. For additional information regarding non-gaap measures see the Company s website * Adjusted for 2017 dispositions 3
CUBE DEVELOPMENT Maximizing Value Through Optimized Development Spacing & stacking across multiple zones Vertical and horizontal optimizations System based approach considers how wells interact in the sub-surface over time Parent-child well impacts minimized with codevelopment in Cubes Preserves economic locations Child wells can be 30% less EUR than parent wells Driving capital efficiency Shared and re-used surface facilities reduce capital costs Higher rig & frac spread productivity Scope and scale necessitates highly sophisticated planning and logistics Relentless pursuit of optimization opportunities IRR per well Acreage NPV Cube Development Maximizes NPV Target NPV Increasing well density (number of wells per section) 4
PERMIAN Q1 HIGHLIGHTS Targeting 30% Annual Production Growth 2018 program on track for 30% annualized production growth Q1 volumes flat from a strong Q4 Q2 growth will be modest with the impact of off-set frac mitigation Cube development & high intensity completions delivering strong well results Managing inflation in a busy basin Managing the supply chain continues to deliver value Self sourcing of materials and continued operational efficiency Utilized 40% local sand in Q1 and transitioning to 100% by year end Permian horizontal LOE of ~$2.50/BOE in Q1 Diversified markets and innovative marketing contracts mitigating constraints in Midland markets Simultaneous Operations at Midland County Cube 5
Cumulative Production (MBOE*) PERMIAN CUBE DEVELOPMENT Strong Results Across New Cubes 2018 cubes will continue to target new benches and spacing and stacking configurations Testing Jo Mill, Middle Spraberry and Wolfcamp C Cube development continues to deliver strong results Martin 10-well cube - average well IP90 1,000 bbls/d oil 70% improvement in IP90 from 2016 to 2018 Midland 8-well cube - average well IP30 1,150 bbls/d oil Improving capital efficiency Average lateral length increasing by 15% to ~9,000 feet Basin leading per rig efficiency Martin Cubes: Improving Productivity by 70% in 2 Years 150 125 100 75 50 25 0 0 30 60 90 120 150 180 Days Martin Type Curve IP180 2016 Martin Cube 2017 Martin Cube 2018 Martin Cube *3-stream production, normalized to 7500 lateral. 6
Liquids (Mbbls/d) MONTNEY Q1 HIGHLIGHTS Set Up To Execute Liquids Growth Plan Montney liquids set to double again by Q4 2018 Growth weighted to second half of 2018 new liquids hubs Sexsmith Plant turn-around planned for Q2 70 Montney Growth on Track Impressive condensate yields on new Cubes 60 Infrastructure solution in place 50 New plants running well over 98% runtime in Q1 Pipestone Keyera agreement for Pipestone Liquids Hub in 2018 and Pipestone Gas Plant in 2021 40 30 New Tower Liquids Hub on track 20 New Pipestone well design driving pace-setter drilling performance 10 0 Q4 2017 Q1 2018 Q2 2018F Q3 2018F Q4 2018F 7
IP30 Condensate Sales (bbls/d) MONTNEY CUBE DEVELOPMENT Strong Condensate Production Driving High Margins Cube development delivering strong operational efficiencies 5 cubes on-stream in Tower in Q1 with 6-14 wells/cube Average initial CGR of 100 bbls/mmcf, ranging from 20-250+ bbls/mmcf 5-cube average well IP30 of ~300 bbls/d of condensate At $50 WTI and $1.50 AECO these wells deliver returns of 80% - 140%, excluding third party capital Encouraging initial results from high intensity completions Testing as tight as 10 foot cluster spacing Strong Condensate Production from Tower Cubes 500 450 400 350 300 250 200 150 100 50 0 Cube 1 Cube 2 Cube 3 Cube 4 Cube 5 Cube Average IP30 Condensate Tower 5-Cube Average 8
Net Wells Rig Released Total Production (MBOE/d) EAGLE FORD & DUVERNAY Quality Assets Generating Free Operating Cash Flow Ŧ Combined 2018 annual production similar to 2017 Delivered ~$85 million of free operating cash flow Ŧ in Q1 Combined netback of ~$36/BOE in Q1 2018 Activity Restarted drilling in Duvernay in Q1 Ramped up Eagle Ford drilling from 1 to 3 rigs in Q1 Front end weighted 2017 program shapes first half 2018 production Both programs on track to return to growth in Q3 2 Austin Chalk wells came online in the quarter averaging 1,925 BOE/d IP30, 70% Oil Unlocking Graben acreage with high intensity completions Drilling Restarting in Eagle Ford and Duvernay 40 60 35 50 30 25 40 20 30 15 20 10 5 10 0 0 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Eagle Ford Net Rig Release Duvernay Net Rig Release Eagle Ford Production MBOE/d Duvernay Production MBOE/d Ŧ Non-GAAP measures defined in advisories. For additional information regarding non-gaap measures see the Company s website. 9
FIRMLY ON TRACK 2018 Q1 Highlights Strong Q1 cash flow Ŧ Strong realized pricing against benchmark prices Oil >100% of WTI and Gas ~83% of NYMEX Cost control Market diversification Enhancing financial resilience $4 billion credit facilities renewed to July 2022 Focus on shareholder returns Repurchased of 10 million shares for $111MM Q1 2018 Net Earnings ($MM) 151 Operating Earnings Ŧ ($MM) 156 Cash Flow Ŧ ($MM) 400 - $ per share, diluted 0.41 Cash Flow Margin Ŧ ($/BOE) 13.70 Upstream Operating Cash Flow Ŧ, Excl. Hedge ($MM) 610 Operating Margin Ŧ, Excl. Hedge ($/BOE) 20.47 Realized Hedge ($/BOE) (1.13) Capital Investment ($MM) 508 Net Debt to Adjusted EBITDA Ŧ 2.2x Ŧ Non-GAAP measures defined in advisories. For additional information regarding non-gaap measures see the Company s website. 10
$/BOE COMPELLING MARGIN EXPANSION Liquids Mix Shift and Efficiency Driving Margin Expansion Oil and condensate growth driving margin expansion 35.00 Converting Price Increase to Netback Sales market diversification increases per unit revenue 30.00 25.00 Realized price more than offsets T&P cost Margin uplift of ~$1.00/BOE Managing costs through the commodity cycle results in margin capture as price rises Netback, excl. hedge per BOE up 38% versus FY 2017 Full value capture of commodity strength 20.00 15.00 10.00 5.00 - Holding the line on Costs FY 2017 Q1 2018 Netback $/BOE excl. hedge Upstream Costs $/BOE Realized Price(excl. hedge) $/BOE 11
EXPANDING MARGINS & DE-RISKING GROWTH Midstream & Marketing Focus Ensuring market access Manage flow assurance through flexible and reliable midstream arrangements Maintain diversified physical sales portfolio Maximizing price realizations Netback optimization, active management of sales portfolio Financial price risk mitigation (active basis and benchmark price hedge programs) Supporting strategy execution De-risks growth plan Minimize commitments and maximize flexibility Reduces cash flow volatility and manages balance sheet risk 12
MARKET DIVERSIFICATION PAYS Q1 Canada Gas Price Uplift Demonstrates Value Q1 Canada Realized Gas Price (incl. Hedge) 96% of NYMEX Full Year AECO Gas Exposure Minimized Q1 Average NYMEX Price US$3.00/MMBtu AECO Basis Hedge: 475 MMcf/d at $(0.87)/Mcf Remaining Exposure 0 100 MMcf/d Sales Market Diversification ~500 MMcf/d * Assumes 1:1 MMcf:MMBtu 13
PERMIAN MIDSTREAM & MARKETING OVERVIEW Diversified Price Exposure Dedicated oil gathering 90% of oil gathered on Medallion system Provides better margins and flow assurance In system storage with multiple sales points Oil marketing Firm transportation to Houston In basin sales at Gulf Coast pricing with firm transport WTI-Midland differential hedges protect in basin sales price Gas gathering & marketing Three midstream providers on P.O.P.*** contracts Ability to take-in-kind to self market Financial basis hedges for Waha Permian 2018* 2019 WTI/Midland Differential Hedges Swap Price (US$/bbl) 31 Mbbls/d $(0.81)/bbl 18 Mbbls/d $(1.42)/bbl Firm oil takeaway 25 Mbbls/d 43 Mbbls/d Waha Basis Hedges Swap Price (US$/Mcf)** 45 MMcf/d $(0.35)/Mcf 45 MMcf/d $(0.35)/Mcf Risk management positions as at March 31, 2018. *April to December 2018 positions. ** Price stated is the differential versus NYMEX pricing. Hedged volumes are converted to Mcf at a 1:1 ratio from MMBtu. *** P.O.P. Percentage of Proceeds 14
PERMIAN MARKET DIVERSIFICATION Maximizing Realized Price & Minimizing Basis Risk Permian realized oil price of $63.27/bbl in Q1 101% of WTI benchmark price Limited Midland differential exposure for 2018 and 2019 Fully protected for 2018 >90% protected for 2019 Access to Gulf Coast and financial hedges maximizes margins on growing volumes Firm Oil Takeaway Permian Oil Volumes WTI/Midland Differential Hedges 15
QUALITY CORPORATE RETURNS 2018 Plan to deliver >30% production growth* while spending within cash flow Ŧ Q1 execution supports 2018 growth plan 5-year plan with ~$3 billion of free cash flow Ŧ at $55 WTI Oil and $3 NYMEX gas 10 million shares repurchased in Q1 for $111 million of $400 million authorization Ŧ Non-GAAP measures defined in advisories. For additional information regarding non-gaap measures see the Company s website *Adjusted for 2017 dispositions
FUTURE ORIENTED INFORMATION This presentation contains certain forward-looking statements or information (collectively, FLS ) within the meaning of applicable securities legislation, including the U.S. Private Securities Litigation Reform Act of 1995. FLS include: expectation of meeting or exceeding targets in corporate guidance and five-year plan anticipated capital program, including focus of development and allocation thereof, number of wells on stream, level of capital productivity, expected return and source of funding well performance, completions intensity, location of acreage and costs relative to peers and within assets anticipated production, including growth from core assets, cash flow, free cash flow, capital coverage, payout, profit, net present value, rates of return, recovery, return on capital employed, production and execution efficiency, operating, income and cash flow margin, and margin expansion, including expected timeframes number of potential drilling locations (including premium return inventory and ability to add to or consume such inventory), well spacing, number of wells per pad, decline rate, rig count, rig release metrics, focus and timing of drilling, anticipated vertical and horizontal drilling, cycle times, commodity composition, gas-oil ratios and operating performance compared to type curves running room and scale of assets, including its competitiveness and pace of growth against peers pacesetting metrics being indicative of future well performance and costs, and sustainability thereof timing, success and benefits from innovation, cube development approach, advanced completions design, scale of development, high-intensity completions and precision targeting, and transferability of ideas expected transportation and processing capacity, commitments, curtailments and restrictions, including flexibility of commercial arrangements and costs and timing of certain infrastructure being operational anticipated reserves and resources, including product types and stacked resource potential anticipated third-party incremental and joint venture carry capital ability to manage costs and efficiencies, including drilling and completion, operating, corporate, transportation and processing, staffing, services and materials secured and supply chain management expected net debt, net debt to adjusted EBITDA, target leverage, financial capacity and other debt metrics growth in long-term shareholder value, options to maximize shareholder returns and timing thereof commodity price outlook outcomes of risk management program, including exposure to commodity prices and foreign exchange, amount of hedged production, market access, market diversification strategy and physical sales locations management of balance sheet and credit rating, including access to sources of liquidity and available cash execution of strategy and future outlook in five-year plan, including expected growth, returns, free cash flow, projections based on commodity prices and use of cash therefrom environmental, health and safety performance advantages of Encana s multi-basin portfolio anticipated dividends or changes thereto impact of changes in laws and regulations, including recent U.S. tax reform anticipated share repurchase program, including amount and number of shares, anticipated timeframe and benefits of program Readers are cautioned against unduly relying on FLS which, by their nature, involve numerous assumptions, risks and uncertainties that may cause such statements not to occur, or results to differ materially from those expressed or implied. These assumptions include: future commodity prices and differentials; foreign exchange rates; ability to access credit facilities and shelf prospectuses; assumptions contained in the Company s corporate guidance, five-year plan and as specified herein; data contained in key modeling statistics; availability of attractive hedges and enforceability of risk management program; effectiveness of Encana's drive to productivity and efficiencies; results from innovations; expectation that counterparties will fulfill their obligations under the gathering, midstream and marketing agreements; access to transportation and processing facilities where Encana operates; assumed tax, royalty and regulatory regimes; enforceability of transaction agreements; and expectations and projections made in light of, and generally consistent with, Encana's historical experience and its perception of historical trends, including with respect to the pace of technological development, benefits achieved and general industry expectations. Risks and uncertainties that may affect these business outcomes include: ability to generate sufficient cash flow to meet obligations; commodity price volatility; ability to secure adequate transportation and potential pipeline curtailments; variability and discretion of Encana's board of directors to declare and pay dividends, if any; variability in the amount, number of shares and timing of purchases, if any, pursuant to the share repurchase program; timing and costs of well, facilities and pipeline construction; business interruption, property and casualty losses or unexpected technical difficulties, including impact of weather; counterparty and credit risk; impact of a downgrade in credit rating and its impact on access to sources of liquidity; fluctuations in currency and interest rates; risks inherent in Encana's corporate guidance; failure to achieve cost and efficiency initiatives; risks inherent in marketing operations; risks associated with technology; changes in or interpretation of royalty, tax, environmental, greenhouse gas, carbon, accounting and other laws or regulations; risks associated with existing and potential lawsuits and regulatory actions made against Encana; impact of disputes arising with its partners, including suspension of certain obligations and inability to dispose of assets or interests in certain arrangements; Encana's ability to acquire or find additional reserves; imprecision of reserves estimates and estimates of recoverable quantities of liquids and natural gas from plays and other sources not currently classified as proved, probable or possible reserves or economic contingent resources, including future net revenue estimates; risks associated with past and future acquisitions or divestitures of certain assets or other transactions or receipt of amounts contemplated under the transaction agreements (such transactions may include third-party capital investments, farm-outs or partnerships, which Encana may refer to from time to time as partnerships or joint ventures and the funds received in respect thereof which Encana may refer to from time to time as proceeds, deferred purchase price and/or carry capital, regardless of the legal form) as a result of various conditions not being met; and other risks and uncertainties impacting Encana's business, as described in its most recent Annual Report on Form 10-K and as described from time to time in Encana s other periodic filings as filed on SEDAR and EDGAR. Although Encana believes the expectations represented by FLS are reasonable, there can be no assurance FLS will prove to be correct. Readers are cautioned that the above assumptions, risks and uncertainties are not exhaustive. FLS are made as of the date hereof and, except as required by law, Encana undertakes no obligation to update publicly or revise any FLS. The FLS contained herein are expressly qualified by these cautionary statements. Certain future oriented financial information or financial outlook information is included in this presentation to communicate current expectations as to Encana s performance. Readers are cautioned that it may not be appropriate for other purposes. Rates of return for a particular asset or well are on a before-tax basis and are based on specified commodity prices with local pricing offsets, capital costs associated with drilling, completing and equipping a well, field operating expenses and certain type curve assumptions. Pacesetter well costs for a particular asset are a composite of the best drilling performance and best completions performance wells in the current quarter in such asset and are presented for comparison purposes. Drilling and completions costs have been normalized as specified in this presentation based on certain lateral lengths for a particular asset. Premium well locations are locations with expected after tax returns greater than 35% at $50/bbl WTI and $3/MMBtu NYMEX. For convenience, references in this presentation to Encana, the Company, we, us and our may, where applicable, refer only to or include any relevant direct and indirect subsidiary corporations and partnerships ( Subsidiaries ) of Encana Corporation, and the assets, activities and initiatives of such Subsidiaries. 17
ADVISORY REGARDING OIL & GAS INFORMATION All estimates in this news release are effective as of December 31, 2017, prepared by qualified reserves evaluators in accordance with procedures and standards contained in the Canadian Oil and Gas Evaluation ("COGE") Handbook, National Instrument 51-101 (NI 51-101) and SEC regulations, as applicable. On August 14, 2017, Encana was granted an exemption by the Canadian Securities Administrators from the requirements under NI 51-101 that each qualified reserves evaluator or qualified reserves auditor appointed under section 3.2 of NI 51-101 and who execute the report under Item 2 of Section 2 of NI 51-101 be independent of Encana. Notwithstanding this exemption, for year-ended December 31, 2017, Encana involved independent qualified reserves auditors to audit a portion of the Company s reserves and economic contingent resources estimates. Detailed Canadian and U.S. protocol disclosure will be contained in the Form 51-101F1 and Annual Report on Form 10-K, respectively, as described in Note 2. Additional detail regarding Encana's economic contingent resources disclosure will be available in the Supplemental Disclosure Document filed concurrently with the Form 51-101F1. Information on the forecast prices and costs used in preparing the Canadian protocol estimates will be contained in the Form 51-101F1. For additional information relating to risks associated with the estimates of reserves and resources, see "Item 1A. Risk Factors" of the Annual Report on Form 10-K. Reserves are the estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, from a given date forward, based on: analysis of drilling, geological, geophysical and engineering data, the use of established technology, and specified economic conditions, which are generally accepted as being reasonable. Proved reserves are those reserves which can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves. Contingent resources do not constitute, and should not be confused with, reserves. Contingent resources are defined as those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. There is uncertainty that it will be commercially viable to produce any portion of the resources. All of the resources classified as contingent are considered to be discovered, and as such have been assigned a 100% chance of discovery, but have however been risked for the chance of development. The chance of development is defined as the likelihood of a project being commercially viable and development proceeding in a timely fashion. Determining the chance of development requires taking into consideration each contingency and quantifying the risks into an overall development risk factor at a project level. Contingent resources are defined as economic contingent resources if they are currently economically recoverable and are categorized as economic if those contingent resources have a positive net present value under currently forecasted prices and costs. In examining economic viability, the same fiscal conditions have been applied as in the estimation of Encana s reserves. Contingencies include factors such as required corporate or third party (such as joint venture partners) approvals, legal, environmental, political and regulatory matters or a lack of infrastructure or markets. None of Encana s estimated contingent resources are subject to technical contingencies. Encana uses the terms play, resource play, total petroleum initially-in-place ( PIIP ), natural gas-in-place ( NGIP ), and crude oil-in-place ( COIP ). Play encompasses resource plays, geological formations and conventional plays. Resource play describes an accumulation of hydrocarbons known to exist over a large areal expanse and/or thick vertical section, which when compared to a conventional play, typically has a lower geological and/or commercial development risk and lower average decline rate. PIIP is defined by the Society of Petroleum Engineers - Petroleum Resources Management System ( SPE-PRMS ) as that quantity of petroleum that is estimated to exist originally in naturally occurring accumulations. It includes that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production plus those estimated quantities in accumulations yet to be discovered (equivalent to total resource potential ). NGIP and COIP are defined in the same manner, with the substitution of natural gas and crude oil where appropriate for the word petroleum. As used by Encana, estimated ultimate recovery ( EUR ), which Encana may refer to as recoverable resource potential, has the meaning set out jointly by the Society of Petroleum Engineers and World Petroleum Congress in the year 2000, being those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from an accumulation, plus those quantities already produced therefrom. Encana has provided information with respect to its assets which are analogous information as defined in NI 51-101, including estimates of PIIP, NGIP, COIP, EUR and production type curves. This analogous information is presented on a basin, sub-basin or area basis utilizing data derived from Encana's internal sources, as well as from a variety of publicly available information sources which are predominantly independent in nature. Production type curves are based on a methodology of analog, empirical and theoretical assessments and workflow with consideration of the specific asset, and as depicted in this presentation, is representative of Encana s current program, including relative to current performance, but are not necessarily indicative of ultimate recovery. Some of this data may not have been prepared by qualified reserves evaluators, may have been prepared based on internal estimates, and the preparation of any estimates may not be in strict accordance with COGEH. Estimates by engineering and geo-technical practitioners may vary and the differences may be significant. Encana believes that the provision of this analogous information is relevant to Encana's oil and gas activities, given its acreage position and operations (either ongoing or planned) in the areas in question, and such information has been updated as of the date hereof unless otherwise specified. Due to the early life nature of the various emerging plays discussed in this presentation, PIIP is the most relevant specific assignable category of estimated resources. There is no certainty that any portion of the resources will be discovered. There is no certainty that it will be commercially viable to produce any portion of the estimated PIIP, NGIP, COIP or EUR. Estimates of drilling locations and premium return well inventory include proved, probable, contingent and unbooked locations. These estimates are prepared internally based on Encana's prospective acreage and are based on an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Approximately 40 percent of all locations specified in our core assets are booked as either reserves or resources, as prepared by internal qualified reserves evaluators using forecast prices and costs as of December 31, 2017. Unbooked locations do not have attributed reserves or resources and have been identified by management as an estimation of Encana's multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves information. There is no certainty that Encana will drill all unbooked locations and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resources or production. The locations on which Encana will actually drill wells, including the number and timing thereof is ultimately dependent upon the availability of capital, regulatory and partner approvals, seasonal restrictions, equipment and personnel, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained, production rate recovery, transportation constraints and other factors. While certain of the unbooked locations have been de-risked by drilling existing wells in relative close proximity to such locations, many of other unbooked locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional proved or probable reserves, resources or production. 30-day IP and other short-term rates are not necessarily indicative of long-term performance or of ultimate recovery. The conversion of natural gas volumes to barrels of oil equivalent ( BOE ) is on the basis of six thousand cubic feet to one barrel. BOE is based on a generic energy equivalency conversion method primarily applicable at the burner tip and does not represent economic value equivalency at the wellhead. Readers are cautioned that BOE may be misleading, particularly if used in isolation. 18
NON-GAAP MEASURES Certain measures in this presentation do not have any standardized meaning as prescribed by U.S. GAAP and, therefore, are considered non-gaap measures. These measures may not be comparable to similar measures presented by other companies. These measures have been provided for meaningful comparisons between current results and other periods and should not be viewed as a substitute for measures reported under U.S. GAAP. For additional information regarding non-gaap measures, including reconciliations, see the Company s website and Encana s most recent Annual Report as filed on SEDAR and EDGAR. Non-GAAP measures include: Non-GAAP Cash Flow, Free Cash Flow and Non-GAAP Cash Flow Margin Non-GAAP Cash Flow (or Cash Flow) is defined as cash from (used in) operating activities excluding net change in other assets and liabilities, net change in non-cash working capital and current tax on sale of assets. Free Cash Flow is Non-GAAP Cash Flow in excess of capital expenditures, excluding net acquisitions and divestitures. Non-GAAP Cash Flow Margin is Non- GAAP Cash Flow per BOE of production. Management believes these measures are useful to the company and its investors as a measure of operating and financial performance across periods and against other companies in the industry, and are an indication of the company s ability to generate cash to finance capital programs, to service debt and to meet other financial obligations. These measures may be used, along with other measures, in the calculation of certain performance targets for the company s management and employees. Forward looking Non-GAAP Cash Flow, Free Cash Flow and Cash Flow Margin: ~$3 Billion Cumulative Free Cash Flow (2018 2022) In total, 2018 through 2022 Cash From Operating Activities is expected to be $13.4B with $500M in net change in non-cash working capital and net change in other assets and liabilities added back, resulting in estimated cumulative Non-GAAP Cash Flow of $13.9B. Cumulative capital expenditures for 2018 through 2022 is expected to be $10.9B, resulting in cumulative Free Cash Flow of $3B. Net change in non-cash working capital is assumed to be zero for 2018 through 2022. Net change in other assets and liabilities is assumed to be about $100M per year for 2018 through 2022. ~$14.00/BOE Cash Flow Margin (2018) 2018 Cash From Operating Activities is expected to be approximately $1.8B with approximately $100M net change in non-cash working capital and net change in other assets and liabilities added back, resulting in an estimated Non-GAAP Cash Flow of $1.9B. This amount divided by the mid-point of the 2018 production guidance of 370 MBOE/d equals the expected Cash Flow Margin of ~$14.00/BOE ~$500 million Free Cash Flow (2019) 2019 Cash From Operating Activities is expected to be approximately $2.2B with approximately $100M net change in non-cash working capital and net change in other assets and liabilities added back, resulting in an estimated Non-GAAP Cash Flow of about $2.3B. Capital expenditures are expected to be about 1.8 billion resulting in non-gaap free cash flow of $500 million Net Debt, Adjusted EBITDA and Net Debt to Adjusted EBITDA Net Debt is defined as long-term debt, including the current portion, less cash and cash equivalents. Management uses this measure as a substitute for total longterm debt in certain internal debt metrics as a measure of the company s ability to service debt obligations and as an indicator of the company s overall financial strength. Adjusted EBITDA is defined as trailing 12-month net earnings (loss) before income taxes, DD&A, impairments, accretion of asset retirement obligation, interest, unrealized gains/losses on risk management, foreign exchange gains/losses, gains/losses on divestitures and other gains/losses. Net Debt to Adjusted EBITDA is monitored by management as an indicator of the company s overall financial strength and as a measure considered comparable to peers in the industry. Operating Margin/Operating Cash Flow/Operating Netback Product revenues less costs associated with delivering the product to market, including production, mineral and other taxes, transportation and processing and operating expenses. When presented on a per BOE basis, Operating Margin/Operating Cash Flow/Operating Netback is defined as indicated divided by average barrels of oil equivalent sales volumes. Operating Margin/Operating Cash Flow/Operating Netback is used by management as an internal measure of the profitability of a play(s). Free Operating Cash Flow Operating Cash Flow in excess of capital investment, excluding net acquisitions and divestitures. Upstream Operating Cash Flow, excluding Risk Management Upstream Operating Cash Flow, excluding Risk Management is a measure that adjusts the Canadian and USA Operations revenues for production, mineral and other taxes, transportation and processing expense, operating expense and the impacts of realized risk management activities. Management monitors Upstream Operating Cash Flow, excluding Risk Management as it reflects operating performance and measures the amount of cash generated from the company s upstream operations. Non-GAAP Operating Earnings (Loss) is defined as Net Earnings (Loss) excluding non-recurring or non-cash items that management believes reduces the comparability of the company s financial performance between periods. These items may include, but are not limited to, unrealized gains/losses on risk management, impairments, restructuring charges, non-operating foreign exchange gains/losses, gains/losses on divestitures and gains on debt retirement. Income taxes may include valuation allowances and the provision related to the pre-tax items listed, as well as income taxes related to divestitures and U.S. tax reform, and adjustments to normalize the effect of income taxes calculated using the estimated annual effective income tax rate. Debt to Adjusted Capitalization Debt to Adjusted Capitalization is a proxy for Encana s financial covenant under the Company s credit facilities which require debt to adjusted capitalization to be less than 60 percent. Adjusted Capitalization includes debt, total shareholders equity and an equity adjustment for cumulative historical ceiling test impairments recorded as at December 31, 2011 in conjunction with the Company s January 1, 2012 adoption of U.S. GAAP. 19